The very first thing we would do with any client who wants to get ahead of their tax bill is to first figure out what their tax bill would actually be, if all things remain the same.

While there are a lot of variables that come into play, we can get a good grasp of things by looking at the tax brackets. We’re still waiting for Congress to finalize many tax laws (an annual exercise), but the seven ordinary income tax rates are the same, starting at 10 percent and topping out at 39.6 percent.

And the IRS inflation adjustments last fall told us what income ranges will be taxed at those various rates. And, so you don’t have to go searching, here they are in the table below.

Tax Rate Single Head of Household Married Filing Jointlyor Surviving Spouse Married Filing Separately
10% Up to $9,075  Up to $12,950  Up to $18,150  Up to $9,075
15% $9,076to $36,900  $12,951to $49,400  $18,151to $73,800  $0,076to $36,900
25% $36,901to $89,350  $49,401to $127,550  $73,801to $148,850  $36,901to $74,425
28% $89,351to $186,350  $127,551to $206,600  $148,851to $226,850  $74,426to $113,425
33% $186,351to $405,100  $206,601to $405,100  $226,851to $405,100  $113,426to $202,550
35% $405,101to $406,750  $405,101to $432,200  $405,101to $457,600  $202,551to $228,800
39.6% $406,751 or more  $432,201 or more  $457,601 or more  $228,801 or more

 

Keep this handy, as it WILL be useful in the process of planning ahead.

Remember, even if your annual salary falls in the 39.6 percent bracket, that doesn’t actually mean that you pay that rate on every dollar you earn.

This is because the U.S. tax system is what is known as “progressive”. This means that you pay the top rate, or whatever bracket your income tops out at, on the “last” dollar you earn. The rest of your money is taxed at the lesser rates leading up to your top tax bracket.

So every federal taxpayer pays 10 percent on the first $9,075 of taxable income that he or she receives. That’s $907.50. Then we pay the 15 percent rate on our earnings that fall into that tax bracket and so on, until all our money is taxed at the proper rate.

These tax calculations mean that while your income may be in the 39.6 bracket, your “effective tax rate” will be less.

All of these considerations go into what moves we make, and when we make them, when we create a tax plan for clients.

And it’s no surprise that wealthier taxpayers also have to worry about some added taxes.

There’s the 3.8 percent Net Investment Income Tax, or NIIT, as well as the additional 0.9 percent Medicare payroll tax on top of the 1.45 percent all of us already have withheld from our paychecks.

These added taxes are applied if you make more than $200,000 as a single filer or $250,000 as a married couple filing jointly.

All these considerations are why it’s better to start thinking about your  taxes now, instead of when it’s too late.

“Worry often gives a small thing a big shadow.” – Swedish Proverb